Stop loss: definition

Setting the loss before entering

A stop loss is an order that automatically closes a position if price reaches a level set in advance. It turns a potentially unlimited loss into a known amount, and lets you calculate position size before entering.

Where to place it

A stop goes where the trade idea is invalidated, not at an arbitrary distance: beyond the support or resistance that justified the entry, or at a multiple of usual volatility, measured for example by ATR. A stop that is too tight gets hit by normal market noise; one that is too wide forces a tiny position.

So the order is: choose the stop level, then derive the position size from the risk you accept. Never the other way round.

Slippage and gaps

A standard stop loss becomes a market order when hit. In a fast market, around an announcement or at the Sunday evening reopening after a busy weekend, it can be filled well beyond its level: that's slippage. Some brokers offer a guaranteed stop, for a premium.

Frequently asked questions

Should you move your stop loss?

Moving it closer to protect a gain is a common technique (trailing stop). Moving it further away to avoid a loss defeats the purpose of the stop and is among the costliest mistakes.

Can the broker see the stop loss?

Yes, it is recorded on their servers. With a regulated broker, it is executed according to their execution policy, which is governed by regulation.